We explore the thinking behind using Bitcoin for international money transfers, and the possible impact of this on the global financial scene.
What is Bitcoin?
A blockchain is a decentralised database of every Bitcoin transaction. When a Bitcoin transaction is made, the global network of connected computers verifies the transaction without the need to “check” first with a bank or clearing house before sending the funds.
This decentralised verification will allow banks to transfer funds to each other faster and at a lower cost. Currently, international money transfers come with relatively high fees and higher exchange rates, to cover the cost of the banks involved.
We’ve written before about Bitcoin being “the currency of the internet”, as it is a digital currency that is transferred peer-to-peer online. Users use an app to pay anyone using the bitcoins in their digital wallet – a form of alternative payment system.
Bitcoin was invented in 2008 by an anonymous security expert known only as Satoshi Nakamoto, who “may or may not be an Australian”, according to some sources.
Bitcoin has previously been criticised for enabling people to buy illegal goods anonymously over the internet. It has also been criticised for being a highly volatile currency, simply because it currently has a very small market. At the time of writing, the Bitcoin exchange rate makes 1 Bitcoin worth $328 AUD, but in the past it has been worth as little at $18 AUD, with massive drops and rises happening overnight.
Australia’s first blockchain?
Perth-based company Ledger Assets says it has created Australia’s first real blockchain, a private blockchain system called EcoChain. As of 2016, this system is still reliant on the international bitcoin blockchain, but the aim is to one day be self-reliant, with EcoChain being an independent Australian blockchain that can stand on its own.
Through the use of solar power, EcoChain can create one new block per minute, 10 times faster than the bitcoin blockchain. This reduces the power used and the speed of settlement.
Government gets involved in blockchain research
The 2016-17 Federal Budget included some interesting measures, not least of which was the government’s statement that the downsized CSIRO research arm Data61 will be pioneering blockchain development:
“The Government will encourage the exploration of Blockchain technology, including through a study and pilot testing by the CSIRO’s Data61. We will also introduce changes to the GST to ensure that consumers are no longer double taxed when using digital currencies such as Bitcoin.” (Budget Overview)
And Standards Australia has been selected as the leader of an ISO task force to develop international standards for blockchain technology.
Australian banks in R3 project to create Australian blockchain
Two of our big four Australian banks – CommBank and Westpac – were working in 2015 on the international R3 project together with Ripple Labs and international banks such as Barclays, Credit Suisse, JP Morgan, and the Royal Bank of Scotland. The R3 project aims to develop a “distributed ledger” technology similar to the “blockchain” that is used in Bitcoin transactions.
As of 2016, CommBank was still experimenting with blcokchain through the R3 project.
Commonwealth Bank executive for institutional banking, Kelly Bayer Rosmarin, says Bitcoin is worth exploring for the sake of Australian consumers.
She said, “The most interesting part of this for CBA is to explore how these distributed ledgers might provide reduced cost and an increase in transparency, efficiency and choice for our customers.”
Westpac’s venture capital fund Reinventure Group has also invested in another leader of bitcoin technology, Coinbase.
Challenges for blockchain technology
One of the big challenges currently being tackled by the R3 project is creating standardised procedures and protocols for blockchain technology, and getting enough financial institutions to agree to use those protocols.
New technology always needs a critical mass of people using it in the same way before it can be truly useful. In this case, a number of organisations around the world would need to agree to the same clear protocols for using Bitcoin or blockchain generally for international money transfers.
Industry experts say banks are likely to be highly interested in blockchain technology or Bitcoin itself because it is so much more efficient than the current international money transfer system.
Another challenge the Commonwealth Bank is currently working on in its R3 trial is “latency”, which is a time lag between funds leaving one party and reaching the other party. Banks process so many transactions each day that they might require a great amount of server power to run a network if latency continued to be an issue.
However, commentators have pointed out that Bitcoin is still far more efficient than the current international money transfer system for the majority of consumers in countries like Africa, who do not have bank accounts. Money transfers require these consumers to turn the transfer into cash at their end, which is costly and adds processing time.
How will Bitcoin and other digital currencies impact on global finance?
Westpac CEO Brian Hartzer said, “The development of the blockchain will certainly have a very interesting and potentially disruptive impact on financial services.”
In fact, the Bank of England reportedly said that digital currencies could be as much a revolution as the internet was.
There are hundreds of open-source blockchain experiments currently being undertaken apart from the R3 project. For example, the much-discussed Ethereum protocol was released in July and has been creating its own blockchain network for transferring contracts for everything from bonds to shares. Because this has a much more general purpose than bitcoin, which simply transfers payment, it would be infinitely useful to traders once it is fully developed.
Greece’s newest finance minister, Yanis Varoufakis, last year suggested that bitcoin could be used in the Eurozone to fight deflation.
Banks don’t want to miss out on the new technology in its early days and risk making themselves redundant – hence CommBank and Westpac’s involved in the R3 project. However, these bank leaders warn that the transition to Bitcoin would be a long-term development after working out how blockchain can replace the existing payments infrastructure.
Blockchain technology could revolutionise how we send money overseas – but it’s still a way off yet. In the meantime, you can compare international money transfers on our website to find the best deals currently on offer.